Sunday, June 29, 2014

I find the case for platinum and palladium even more compelling than anything else right now. When you think that the top supplier of these metals is Russia, and that the second biggest is South Africa, which is on strike, I find it surprising that the price of platinum and palladium has not exploded.

I also see what goes on in the paper markets, however. The commercials are taking on an increasing short position in both of these metals, which is pushing the metals lower. A recovery in platinum and palladium would certainly help all precious metals move higher, including gold and silver.

I think that there’s a great case to be made in platinum and palladium.

Friday, June 27, 2014

Well, I imagine that people in the area – in countries like Romania or Bulgaria, or in the Ukraine itself – would be thinking about putting some of their money in gold right now. Obviously it does bring people into the gold market.

I prefer not to fall back on these sorts of possibilities as reasons to own gold. These are ‘black swans’ for gold. I prefer to focus on the physical shortage argument for owning gold, because I believe the case there is black and white. The means and motive for suppressing the price of gold are well-known. And the physical will win the day.

Now, gold will benefit from black swans – a war, governments going broke or the recession getting worse. These could happen, but things are changing in the precious metals markets regardless of these events.

Wednesday, June 25, 2014

Natural-resource-based industries are very capital intensive, and hence extremely cyclical. It is not unreasonable to say that as a natural-resource investor, you are either contrarian or you will be a victim. These markets are risky and volatile!

Why cyclicality?

Let's talk about cyclicality first. Some of the cyclicality of these industries is a function of their being extraordinarily capital intensive. This lengthens the companies' response times to market cycles. Strengthening copper prices, for example, do not immediately result in increased copper production in many market cycles, because the production cycle requires new deposits to be discovered, financed, and constructed—a process that can consume a decade.

Price declines—even declines below the industry's total production costs—do not immediately cause massive production cuts. The "sunk capital" involved in discovery and construction of mining projects and attendant infrastructure (such as smelters, railways, and ports) causes the industry to produce down to, and sometimes below, their cash costs of production.

Producers often engage in a "last man standing" contest, to drive others to mothball productive assets, citing the high cost of shutdown and restart. They fail to mention their conflicts of interest as managers, whose compensation is linked to running operational mines.

Interest-rate cycles can raise or lower the cost and availability of capital, and the accompanying business cycles certainly influence demand. Given the "trapped" nature of the industry's productive assets, local political and fiscal cycles can also influence outcomes in natural-resource investments.

Today, I believe that we are still in a resource "supercycle," a long-term period of increasing commodity prices in both nominal and real terms. The market conditions of the past two years have made many observers doubt this assertion. But I believe the current cyclical decline is a normal and healthy part of the ongoing secular bull market.

Has this happened in the past?

The most striking analogy to the current situation occurred in the epic gold bull market in the 1970s. Many of you will recall that in that bull market, gold prices advanced from US$35 per ounce to $850 per ounce over the course of a decade. Fewer of you will recall that in the middle of that bull market, in 1975 and 1976, a cyclical decline saw the price of gold decline by 50%, from about $200 per ounce down to about $100 per ounce. It then rebounded over the next six years to $850 per ounce.

Investors who lacked the conviction to maintain their positions missed an 850% move over six short years. The current gold bull market, since its inception in 2000, has experienced eight declines of 10% or greater, and three declines—including the present one—of more than 20%.

This volatility need not threaten the investor who has the intellectual and financial resources to exploit it.

The natural-resources bull market lives…

The supercycle is a direct result of several factors. The most important of these is, ironically, the deep resource bear markets which lasted for almost two decades, commencing in 1982.

This period critically constrained investment in a capital-intensive industry where assets are depleted over time.

National oil companies (NOCs) exacerbated this decline in many nations by milking their oil and gas industries to subsidize domestic spending programs for political gain. This was done at the expense of sustaining capital investments. The worst examples are Mexico, Venezuela, Ecuador, Peru, Indonesia, and Iran. I believe 25% of world export crude capacity may be at risk from failure of NOCs to maintain and expand their productive assets.

Demands for social contributions in the form of taxes, royalties, carried equity interests, social or infrastructure contributions, and the like have increased. Voters are not concerned that producers need real returns to recover from two decades of underinvestment or to fund capital investments to offset depletion. Today this is actively constraining investment, and hence supply.

Poor people getting richer…

The supercycle is also driven by globalization and the social and political liberalization of emerging and frontier markets. As people become freer, they tend to become richer.

As poor countries become less poor, their purchases tend to be very commodity-centric, especially compared to Western consumers. For the 3.5 billion people at the bottom of the economic pyramid, the goods that provide the most utility are material goods and consumables, rather than the information services or "high value-added" goods.

A poor or very poor household is likely to increase its aggregate calorie consumption—both by eating more food and more energy-dense food like meat. They will likely consume more electrical power and motor fuel and upgrade their home from adobe or thatch to higher-quality building materials. As people's incomes increase in developing and frontier markets, the goods they buy are commodity-intensive, which drives up demand per capita. And we are talking billions of "capitas."

Rising incomes and savings among certain cultures in the Middle East, South Asia, and East Asia—places with a strong cultural affinity for bullion—have increased the demand for gold, silver, platinum, and palladium bullion. Bullion has been a store of value in these regions for generations, and rising incomes have generated physical bullion demand that has surprised many Western-centric analysts.

Competitive devaluation

The third important driver in this cycle has been the depreciation of currencies and the impact that has had on nominal pricing for resources and precious metals.

Most developed economies have consumed and borrowed at worrying levels. The United States federal government has on-balance-sheet liabilities of over $16 trillion, and off-balance-sheet liabilities estimated at around $70 trillion.

These numbers do not include state and local government liabilities, nor the likely liabilities from underfunded private pensions. Not to mention increased costs associated with more comprehensive health care and an aging population!

Many analysts are even more concerned about the debts and liabilities of other developed economies—Europe and Japan. In both places, debt-to-GDP ratios are greater than in the US. Europe and Japan are financing themselves through a combination of artificially low interest rates and more borrowing and money printing. This drives down the value of their currencies, helping their exports.

But which nations' leaders will stand firm and allow their export industries to wither as their domestic producers suffer from cheap competing foreign goods? If Japan's Abe is successful at increasing his country's exports at the expense of its competitors like Taiwan, Korea, or China, then his policies could lead to competitive devaluation. And how will the European community react, for that matter?

Loss of purchasing power in fiat currencies increases the nominal pricing of commodities and drives demand for bullion as a preferred savings vehicle.

The factors that have driven this resource supercycle have not changed. Demand is increasing. Supplies are constrained. Currencies are weakening. Thus I believe we remain in a secular bull market for natural resources and precious metals.

With that in mind, I would call the current market for bullion and resource equities a sale.

Where to invest?

Let's talk about a type of company most of us follow: mineral exploration companies, or "juniors." We often confuse the minerals exploration business with an asset-based business. I would argue that is a mistake.

Entities that explore for minerals are actually more similar to "the research and development" space of the mining industry. They are knowledge-based businesses.

When I was in university, I learned that one in 3,000 "mineralized anomalies" (exploration targets) ended up becoming a mine. I doubt those odds have improved much in 40 years. So investors take a 1-in-3,000 chance in order to receive a 10-to-1 return.

These are not good odds. But understanding the industry improves them substantially.

Exploration companies are similar to outsourcing companies. Major mining companies today conduct relatively little exploration. Their competitive advantage lies in scale, financial stability, and engineering and construction expertise. Similar to how big companies in other sectors outsource certain tasks to smaller, more specialized shops, the big miners let the juniors take on exploration risk and reward the successful ones via acquisitions.

Major companies are punished rather than rewarded for exploration activities in the short term. Majors therefore tend to focus on the acquisition of successful juniors as a growth strategy.

Today, the junior model is broken. Many public exploration companies spend a majority of their capital on general and administrative expenses, including fundraising. Overlay a hefty administrative load on an activity with a slim probability of success, and these challenges become even more severe.

One response from the exploration and financial community has been to put less emphasis on exploration success and focus instead on "market success." In this model, rather than "turning rocks into money," the process becomes "turning rocks into paper, and paper into money."

One manifestation of that is the juniors' habit of recycling exploration targets that have failed repeatedly in the past but can be counted on to yield decent confirmation holes, and the tendency to acquire hyper-marginal deposits and promote the value of resources underground without mentioning the cost of actually extracting them.

The industry has been quite successful, during bull markets, at causing "sophisticated" investors to focus on exciting but meaningless criteria.

Being successful in natural-resource investing requires you to make choices. If your broker convinces you to buy the sector as a whole, they will have lived up to their moniker—you will become "broker" and "broker."

We have already said that exploration is a knowledge-based business. The truth is that a small number of people involved in the sector generate the overwhelming majority of the successes. This realization is key to improving our odds of success.

"Pareto's law" is the social scientists' term for the so-called "80-20 rule," which holds that 80% of the work is accomplished by 20% of the participants.

A substantial body of evidence exists that it is roughly true across a variety of disciplines. In a large enough sample, this remains true within that top 20%—meaning 20% of the top 20%, or 4% of the population, contributes in excess of 60% of the utility.

The key as investors is to judge management teams by their past success. I believe this is usually much more relevant than their current exploration project.

It is important as well that their past successes are directly relevant to the task at hand. A mining entrepreneur might have past success operating a gold mine in French-speaking Quebec. Very impressive, except that this same promoter now proposes to explore for copper, in young volcanic rocks, in Peru!

In my experience, more than half of the management teams you interview will have no history of success that shows that they are apt at executing their current project.

Management must be able to identify the most important unanswered question that can make or break the project. They must be able to say how that question or thesis was identified, explain the process by which the question will be answered, the time required to answer the question, how much money it will take. They also need to know how to recognize when they have answered the question. Many of the management teams you interview will be unable to address this sequence of questions, and therefore will have a very difficult time adding value.

The resource sector is capital intensive and highly cyclical, and we expect that the current pullback is a cyclical decline from an overheated bull market. The fundamental reasons to own natural resource and precious metals have not changed. Warren Buffett says, "Be brave when others are afraid, be afraid when others are brave." We are still "gold bugs." And even "gold bulls."

Rick Rule is the chairman and founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. He has dedicated his entire adult life to different aspects of natural-resource investing and has a worldwide network of contacts in the natural-resource and finance worlds.

Watch Rick and an all-star cast of natural-resource and investment experts—including Frank Giustra, Doug Casey, John Mauldin, and Ross Beaty—in the must-see video "Upturn Millionaires," and discover how to play the turning tides in junior mining stocks, for potentially life-changing gains. Click here to watch.

Monday, June 23, 2014

In this EXCLUSIVE, MUST LISTEN interview with The Doc, Eric Sprott dissects the fundamentals in the gold and silver markets, coverage of manipulation finally reaching the mainstream, and reveals his updated outlook on gold & silver.

Eric discusses why the precious metals options markets always expire at MAX PAIN for the customers, and why he urges all PM investors to STAY OUT of the futures options markets, and simply accumulate physical metal.

Sprott explains how PM manipulation shifted from being conducted solely by the Central banks to the dealers active daily participation that we see now, and discusses how much he personally lost when a Barclays trader manipulated gold down into the London fix.

Regarding his price outlook for the metals, with silver trading under $20 and gold trading near $1250, is Eric still looking for new highs in 2014?

Saturday, June 21, 2014

It's counterintuitive to buy an industry that's in liquidation, but unless the price of the commodity increases, the commodity becomes unavailable. Can you imagine a world without coal or uranium? That's a world without power. Even in the People's Republic of California, even though the people of the state hate coal and uranium, those energy sources are still a substantial contributor to the power grid.

So either the price of these two commodities goes up or the lights go off. Those are the two choices, and I'm betting that the price is going to go higher.

Thursday, June 19, 2014

I think the gold and silver markets are going lower in the very near term. That might just be me talking my book because I have lots of cash to spend. I noticed that we've had 10 acquisitions in the gold sector in the last 12 months, but it hasn't picked up sentiment in the sector. I think this is extremely bullish.

Takeovers generally bring cash and courage into a market, and that there are still sellers in the face of all this good news is perversely, to me, very encouraging. We just had another $570 million acquisition announced today.

I don't know if you saw Ivanhoe Mines’ financing, but when the best promoter in the world figures out that in order to get the project going he needs raise the money and goes ahead and offers a full warrant, that tells me that we are coming into a very good financing season.

It's funny that the B-grade promoters in Vancouver are arguing with you, trying to get a half a warrant, while the best promoter in the world, Robert Friedland, decides that he has to advance his project and so, yes, he gives a full warrant. I promise you that the B-grade promoters will come to their senses because they are not better promoters than Friedland. Also, the platinum and palladium markets have been performing relatively well. We have lost 1 million ounces of platinum production, so that will give us a deficit of 1.6 million ounces for the year.

Of course we are attracted to other markets that investors hate right now. Uranium is selling at about $28 a pound when it takes about $70 to make, including sustaining capital. So that can't last forever. Also, the coal markets are clearly in liquidation mode, but we are certainly attracted at this point to the coal sector. We are also attracted to the ag-mineral space, although it's probably early there.

I should explain to KWN readers around the world that I have made a lot of money over the last three decades investing in sectors that are in liquidation. This occurs when the selling price of the commodity is less than the cost of producing it.

Tuesday, June 17, 2014

I am just back from Asia, Eric. That trip just reinforced to me that the resource market is probably bottoming and heading higher. The demand for resource-related investments in Asia is incredibly strong....

As you know, Sprott has won mandates from a variety of Asian investing entities. Visiting with them and going to speak at a conference in Hong Kong just reinforced the need that Asia has for resource related investments, which will most likely be in place for the next 10 years.

The difference in sentiment between the conference I spoke at in Hong Kong and the conference I just spoke at in Vancouver was really noticeable. The Asians view this as an incredible opportunity to get involved in the sector, whereas in Vancouver you could feel the mood was downbeat.

We both know that the summer is generally very soft in junior resources. My suspicion is that we are now entering a period from now to September that is perhaps the last good buying opportunity in the sector. So that's what I'm focused on. I'm looking for bargains and looking to deploy the money that Sprott has been successful in raising over the last year.

Sunday, June 15, 2014

Well, there’s going to be a point where countries will have to assess each of the currencies on their own merits. As you know, I live in Canada, and I can assure you that when I look at the data that the U.S. supplies, the dollar will lose a lot of value. I am sure that countries like China and Russia would look at the same data and come to the same conclusion.

China and Russia look like they could already be turning their backs on the dollar. Brazil and India have complained about the printing of money and the disastrous effects on currencies. They could also be turning their back on the dollar.

I am not so sure that the dollar will remain in the same high esteem as the market has historically given it.

In the broad stock market, things have not started to change just yet, but we are starting to see some cracks appear. Housing numbers have been quite weak. We’ve seen tech stocks come under attack. Some of the major banks have warnings on their trading levels going forward. Those stocks seem to be breaking. So the generals are coming under pressure.

I’m not sure when a decline will start happening, but I feel safe in predicting that within 24 months, the value of these stocks will be much lower than today. I don’t think it’s nearly as safe as the banking interests would tell you.

Friday, June 13, 2014

Well, I don’t think that is likely. The Chinese government controls all exports of gold and since they are a net buyer, they probably would not allow any exports.

The amounts of gold involved are so large that clandestine sources seem unlikely. There is only one government in the world that even owns 4,000 tonnes – that’s the U.S., supposedly.

I think it comes down to the powers that be simply trying to keep things under control. The dollar is coming under extreme pressure here, and it looks to have broken down here, in fact. That should have people going into gold.

The U.S. GDP growth, which was expected to be around 0.1%, will probably be revised even lower in the first quarter of 2014. I do not believe that any economic recovery is really occurring, because the middle class is simply being routed. We are seeing no real wage gains and inflation is well beyond reported CPI numbers, which are just a joke. In the real world, we all know inflation is much higher.

Wednesday, June 11, 2014

I am very excited about developments in the gold and silver markets today. I have been speculating since late 2012 that Western central banks could be running out of gold. I put the sell-off in gold and silver in 2013 to the fact that the Western banks needed a way to generate physical gold supplies. As the metals prices went down, there was a lot of liquidation of gold which increased the supply by an estimated 900 tonnes last year.Let’s look at the figures. The annual supply of gold is around 4,300 tonnes. 3,000 tonnes come from mining and the other 1,300 tonnes or so from recycled material2. In 2013, an additional 900 tonnes came onto the market from ETFs that were being liquidated – a supply increase of around 21%.

Quite frankly, I believe this was all orchestrated in order to create this supply. During the time when the price was knocked down, a tsunami of buying started. India bought 336 tonnes from April to June of 20133. I’m sure that the central bankers went to the Reserve Bank of India and said: “You’ve got to stop people from buying gold.”

Of course, the Reserve Bank of India went on to create rule after rule to try to stop people from buying gold. They managed to get monthly imports of gold down to around 20 tonnes from its normal imports of around 80 tonnes per month. Obviously, those official numbers leave out smuggling, which probably makes up a very large amount of gold imported into India.

At the same time that Indians were buying, the Chinese were jumping in, too. The mine supply, excluding China and Russia which tend not to export any gold, is only around 190 tonnes per month. You had Indians buying 50 tonnes and China buying 90 tonnes4 – that does not leave much left over for the rest of the world. Blogger Koos Jansen, from In Gold We Trust, says that Chinese demand alone last year was 2,000 tonnes5. So demand has far outstripped supply.

There is also interesting news coming from Dubai concerning this supply/demand imbalance. A group there is building a gold refinery that can process 1,400 tonnes of gold per year6. Well, the current refining capacity in the world is around 6,000 tonnes. Somebody is going to add another 20 percent of capacity. The supply falls far short of that at only 4,300 tonnes. Why is this refining capacity so much higher than the official supply of gold?I believe that the volume of gold being exchanged must therefore be much higher than the official number of 4,300. To me, it’s just another piece to the puzzle, and it all points to central banks surreptitiously supplying gold to China. Gold from central banks, held in LBMA-sized bars, is being recast into kilogram-sized bars, which are preferred in Asia. It all points to this: gold is flooding out of central banks in the West and into Asia’s coffers.Another piece to the puzzle is Germany’s current effort to repatriate its gold supposedly held by the U.S. So far, it has only received 5 tonnes back from the U.S. Treasury7. They’ve asked for 300 tonnes back over 7 years. That would imply around 3.6 tonnes per month.

It’s worth noting that the U.S. is supposedly the largest holder of physical gold in the world. Its books should contain 1,500 tonnes held for Germany8 and 8,100 metric tonnes of its own9. So why have they only delivered 5 tonnes over the last year?We now get monthly data from Switzerland about where its gold imports come from. In February, 114 metric tonnes came from the UK10 – a country which does not produce any gold. So where did that gold come from? Who did it belong to? The most obvious answer would be the Bank of England, or ETF holdings.Data from the U.S. offers a similar problem. The U.S. Geological Survey showed that the U.S. exported 80 tonnes of gold in January11. The U.S. onlymines 20 tonnes a month12, and imports another 20. So where did the extra 40 tonnes of exports come from? Who supplied it? The answer is most likely the U.S. Treasury.

The whole reason for Western central banks, particularly the U.S. to supply gold to Asia is to suppress the price of physical gold. Most people realize that low interest rates and printing money will eventually be very bad for the U.S. dollar. One thing that would tip people off to imminent danger to the U.S. dollar would be a much higher gold price. Keeping gold’s price low is just part of the financial policy.

All this money printing is designed to help the U.S. address its massive obligations, which include its current debts and off-balance sheet obligations of around 80 trillion dollars. Their annual revenues are only around 2.8 trillion dollars and their expenditures are 3.5 trillion13. Everyone knows there’s no way they can afford to keep going and cover their obligations. This leaves money printing to cover the gap.

Ultimately, we will find out the extent of manipulation in the gold market when someone finally fails – most probably the U.S. running out of gold to supply the market. And I don’t think we are far off here.

Monday, June 9, 2014

“This is one of the reasons why I thought they had the raid last year was to get an extra 1,000+ tons out of the ETFs because they had run out of gold.

And it (the amount of gold being dishoarded) has obviously gone up. When you think, Eric, the Chinese increase their imports by a minimum of 1,000 tons -- that’s a 25-percent piece of the market that they never had before, and the price went down. And the Indians came in and bought an extra 20 percent of the silver market last year, and the price went down. (Laughter ensues).

We have all these incongruous things happen that in a normal market are literally impossible. All the physical evidence we have suggests there is way more demand than supply in all those markets. And sooner or later there will be a failure to deliver. How long they can keep up the goings-on in the Comex and the LBMA when there are no real deliveries? We’ll see because we are not far from the time when there is nothing left to buy.”

Saturday, June 7, 2014

“Eric and I are very much in agreement that investors and voters on a global basis have been conned because they want to be conned into believing that the liquidity we see in the system now is a substitute for solvency. If we are right and the status quo is wrong, then the first metal to move will be gold.

But the metal that moves the furthest will be silver. Eric believes that we are past the tipping point. Eric believes that we are already on the way up in the gold and silver markets. He has much more experience as a market-caller than I do. I’m agnostic as to timing and the circumstances we are discussing. But betting against Eric Sprott on a consistent basis in the last 25 years has not been a very good use of money.”

Thursday, June 5, 2014

I’ve been very closely involved in the news surrounding these lawsuits. I’ve read through the court cases, and spoke with some of the lawyers involved before the suits were filed to see what kind of work they had done. Knowing what the prize could be, these lawyers have put a lot of effort into creating a bona fide class action case.

If the suit is authorized, we will be able to go look through records and find out, for instance, who sold 100 percent of the annual supply of silver in one day and 50 percent of the gold supply in one day. The way I see it, where there’s smoke there should be fire.

I think that these are not frivolous lawsuits. As many as 20 firms showed up in court two days ago to press for the classification as a class-action lawsuit. There should be a lot of money and power directed at getting this thing to court. Based on the data that we have looked at, there will be some revelations.

I would point back to the comment by Germany’s regulator, BaFin, who said that possible manipulation in gold could be worse than LIBOR. I am actually surprised by the massive sums that are traded each day in gold. The gains to be made by gaming the system are very substantial – we’re talking billions of dollars, and the fixing process appears to be a complete joke. When the Chairs of the committee to fix the price of gold in London got together, about four or five people knew where the price was going to be post-fixing. They were probably the same people doing all the trading around it, including the derivatives trading, which is an easier way to make money because it is a much bigger market.

I hope that the proceedings take place and that we are able to see evidence of who was doing what in these markets over the last 10 years.

Tuesday, June 3, 2014

I imagine that people in the area – in countries like Romania or Bulgaria, or in the Ukraine itself – would be thinking about putting some of their money in gold right now. Obviously it does bring people into the gold market.

I prefer not to fall back on these sorts of possibilities as reasons to own gold. These are ‘black swans’ for gold. I prefer to focus on the physical shortage argument for owning gold, because I believe the case there is black and white. The means and motive for suppressing the price of gold are well-known. And the physical will win the day.

Now, gold will benefit from black swans – a war, governments going broke or the recession getting worse. These could happen, but things are changing in the precious metals markets regardless of these events.

Sunday, June 1, 2014

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, talk about silver. They talk about the disparities between the physical market and the paper silver markets. Eric talks about supply and demand and how the upward pressures on silver price from demand growing much faster than supply are not being accurately reflected. A 900 million ounce silver supply simply cannot cope with a 380 million ounce increase in demand and maintain current prices.